Interest rates hit 4% – commercial credit reaction

The Monetary Policy Committee (MPC of the Bank of England has moved decisively to curb inflationary pressures by raising the interest base rate  from 3.75% to 4%.

Commenting on the 8-1 decision of the Monetary Policy Committee of the Bank of England to increase interest rates to 4%, Anna Leach, Chief Economist at the Institute of Directors, said “Today’s was a sobering announcement from the MPC, reflecting a step-change in inflationary risks facing the UK. An expectation that inflation will reach 5% next year cements a unanimous vote for rates to go up, with one member – Catherine L. Mann – voting for a bigger 50 basis point rise. Add to that a slower pace of disinflation, with services inflation and wage growth all holding, and a more resilient economy, and the case for a move now is made. But dissention re-emerges when it comes to the path for rates in the future.

“Uncertainty remains over the resilience of companies and households, the outlook for energy prices and the responsiveness of inflation expectations. The tightrope for the MPC remains one of balancing fragile demand against the energy shock. So the question remains over how high interest rates will need to rise in the months ahead. But the headwinds facing the UK economy will rise regardless, adding further urgency to the Government’s reform agenda.”

Mike Randall, CEO at Simply Asset Finance said “A rise in interest rates adds yet another pressure to SMEs, with many already navigating higher operating costs and difficult trading conditions. To keep the economy moving during this period, we need to improve productivity by giving businesses the funding to invest and pursue growth. 

“With borrowing costs high and businesses already squeezed some may be put off investing, while others may feel pressure to access capital quickly. It is critical in times like these that businesses secure funding that works for them in the long term. Affordability and suitability must remain at the heart of SME lending.  

“Ultimately, lenders need to step up as genuine partners to SMEs, helping them access the right funding solution, at the right time, so they can invest strategically, improve productivity, and continue to grow.” 

Theo Chatha Group Chief Financial Officer & Managing Director of Specialist Finance at Bibby Financial Services said “Today’s interest rate rise is another blow for SMEs already feeling the squeeze, particularly after a disappointing Budget. Over half (52%) of SMEs told us lower interest rates would make them more confident to invest, yet today we’ve seen the opposite happen. This rate rise will increase borrowing costs, put investment plans at risk, and leave the UK’s small businesses with even shallower pockets.

“For exporters, the pressure is even greater. SMEs trading internationally often wait months to be paid by overseas buyers, so higher rates make bridging that gap more expensive. Our International Trade Report found that two-thirds (67%) of SME exporters already say that international trading conditions have increased pressure on their cashflow over the past year, and 29% are struggling with currency volatility.

“SMEs haven’t lost their ambition to grow, and there are practical steps they can take to keep that growth on track. Protecting cashflow is critical – business leaders should assess their funding mix, and if they trade overseas, treat FX management as essential rather than optional. Those who act now to put the right strategies in place will be in the best position to keep their growth on track.”

Rob Keown-Boyd, CEO of multifi, said “This is the first rate rise in more than three years and it’s another hit for SMEs, just a week after the Budget which did little to ease the cost of doing business. Small businesses were already under real pressure before today – inflation is at its highest level in almost a year and staff costs keep increasing, and now higher borrowing costs add to the cashflow crisis being experienced by firms up and down the country.

“Paying more to borrow is one thing, but for a lot of SMEs the real challenge is being able to access finance. Demand for working capital has been on the rise, with applications at multifi running around a third higher than this time last year. The worry now is that higher borrowing costs put businesses off getting finance when they need it most.

“Lenders need to make working capital as quick and easy to get as possible and help businesses keep their cashflow ticking over while costs are increasing. If firms do end up going without the finance they need, it’ll be hiring and investment that get put on hold first.”

Tina McKenzie, National Chair of the Federation of Small Businesses, said “Today’s rate rise is a sobering reminder that the fallout from global turmoil is landing squarely on the shoulders of Britain’s small businesses. For a small business owner juggling a business loan, commercial mortgage and mortgage on their own home, the impact of higher interest rates is felt both at work and around the kitchen table.

“With global energy and fuel prices driving inflation, today’s decision is not unexpected. But it will still make life harder for small firms, pushing up the cost of credit while leaving households with less money to spend. Two in five small business borrowers were already facing interest rates of 10 per cent or more last quarter, suggesting many lenders had anticipated a rise.

“On top of this, more than half (53%) of small firms cite fuel as their biggest rising cost, showing just how much pressure businesses are under before higher interest rates are factored in. Banks have a vital role to play in helping small firms through this period.

“That means making credit more accessible, particularly overdraft facilities, which have become harder to come by in recent years. Small businesses need the flexibility to manage their cash flow, not fewer options when money is already tight.

“Elsewhere, it’s worrying to see that there are 100,000 fewer SMEs in the UK economy than there were at the start of 2025. Entrepreneurship is essential to get the economy growing again.”

Neil Rudge, Chief Banking Officer at Shawbrook, said “The first rate rise since August 2023, and a long way from where the year began, when markets were pricing in cuts. The war in Iran has torn up that script, and with energy costs pushing prices up, inflation pressure looks set to run well into 2027. That lands on top of a Budget written with the high street in mind. Relief for shops and pubs is welcome, but the smallest always dominate the debate.

“The mid-sized businesses driving a disproportionate share of jobs and growth got little from it, and they’re picking up the bill for a higher minimum wage. Yet they aren’t retreating. Our research shows 92% of mid-sized businesses plan to invest in the next year.”

Darren Power, National Head of Broker New Business  at Atradius UK said “This rise comes at a difficult time for businesses. Our latest data shows claims for late or failed payments rose nearly 13% month-on-month in September, so there are already signs of cash flow pressure working through supply chains.

“Firms using variable-rate borrowing or overdrafts could feel higher costs relatively quickly, while others will face the squeeze when they refinance or take on new debt. Businesses already carrying high levels of debt or relying heavily on working-capital finance have less room to absorb that increase.

“That means the impact will vary significantly between sectors. Construction businesses are already managing tight liquidity and elevated borrowing costs, while retailers reliant on finance to fund seasonal stock and capital-intensive manufacturers can also be particularly sensitive to higher financing costs.

“For suppliers, the warning signs may appear before a customer actually fails. Longer payment terms, repeated requests for extensions or invoices starting to slip can all indicate that higher borrowing and operating costs are beginning to bite.

“A rate rise will not cause every financially stretched business to fail, but it removes another slice of financial headroom at a point when many firms can least afford it.”

Suren Thiru, ICAEW Chief Economist, said “Raising interest rates is policymakers’ precautionary attempt to put the lid back on inflation following the Iran conflict-induced energy shock, but households and businesses will feel the pinch immediately through higher borrowing costs and tighter finances.

“This rate rise signals a sizable shift in direction. The strong backing for this decision and the tone of the minutes suggest further increases are probable, even if most rate-setters are in no hurry to tighten policy aggressively.

“The path for interest rates is hanging in the balance, with US-Iran hostilities holding the key. Unless energy prices start to retreat, further rate hikes will move from a risk to a real prospect.

“With the Bank forecasting inflation to climb further in the months ahead, policymakers are likely to remain on high alert to mounting price pressures, leaving a February rate rise looking increasingly likely.”